Explanation:
The correct answer is B.
The company selling the option holds a short position. Because the option buyer pays the premium upfront and has no further financial obligations to the seller (the buyer has the right, but not the obligation, to exercise), the seller faces zero credit risk from the buyer. Thus, the counterparty credit exposure from this transaction to the company selling the option is $0.
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Q.5435 A European-style call option on Electric Inc. shares is currently trading with a time to expiration of 3 months, a strike price of $25, an underlying asset price of $47, and implied annual volatility of 23%. Suppose the option has an upfront premium and the annual risk-free interest rate is 1.5%, what is the counterparty credit exposure from this transaction to a company selling the option?
A
$22
B
$0
C
$5.75
D
$37.5
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